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Estate Planning > The Federal Gift Tax > Flashcards

The Federal Gift Tax Flashcards

1
Q

What does it mean that the gift and estate tax are unified?

A

They are coupled together to ensure that taxes are paid in some form or fashion on estate transfers while alive or after death

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2
Q

What are the common estate and gift characteristics of the unified tax system?

A

Marital deduction - unlimited
Charitable deduction - unlimited
Applicable credit amount - total tax credit
Applicable exclusion amount - $ amt before tax liability
Cumulative in nature

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3
Q

What does it mean that the gift and estate tax is cumulative?

A

Similar to tax brackets. All prior year gifts are added to current year gifts which moves the donor up in taxable brackets until the max 40%

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4
Q

What are characteristics that only apply to gift tax?

A

Gift splitting - double annual exclusion
Annual exclusion- $16k
Income tax basis - donee takes the FMV of the donor

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5
Q

What is the IRS form for gift tax reporting?

A

709

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6
Q

What are general tax rules with gift taxes?

A

Form 709 filed with 1040
If after death, gift tax will be reported with estate tax
No need to file 709 if amount is below exclusion

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7
Q

What is the distinguishing characteristic of a completed transfer?

A

That the donor relinquishes all dominion and control over the transferred property

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8
Q

Retaining a life estate in property while giving title to the property to someone else is an example of…

A

Completing a partial gift

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9
Q

How is the gift tax valuation assertained?

A

FMV of the gifted asset at the time of gifting

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10
Q

How is FMV on stocks ascertained?

A

(a)Avg (FMV) of last trade date before gift x # business days from gift to first trade
(b) Avg (FMV) of first trade date after gift x # business days from last trade to gift
———————————
((a)+(b)) / total # of business days = gift tax FMV

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11
Q

What is a market absorption discount in relation to FMV?

A

An acceptance that if a market is flooded with a particular real estate type, it will drive down the FMV of that asset.

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12
Q

For closely held stock, what are minority interest and lack of marketability discounts?

A

Minority - the inability to influence business policy
Marketability - hard to sell closely held stock

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13
Q

How is a gifted life insurance policy valued?

A

By its replacement cost, NOT its face value.

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14
Q

How is co-owned property valued?

A

TC: FMV by % of ownership
TWROS: FMV / # owners
TE & CE: 50% FMV

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15
Q

How are bonds valued?

A

Mean between the highest and lowest sales price on the completed gift day.

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16
Q

How are government bonds valued?

A

Measured by the redemptive value of the bond on the transfer date

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17
Q

What are the chapter 14 rules?

A

Has the benefit of estate asset freezing. These are the special rules governing the valuation of certain transfers to prevent them from being undervalued on purpose (intrafamily)

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18
Q

What does GRUT stand for?

A

Grantor retained unitrust

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19
Q

What does GRAT stand for?

A

Grantor retained annuity trust

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20
Q

What does GRIT stand for?

A

Grantor retained income trust

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21
Q

What are the 4 transfers that Chapter 14 does not apply to?

A

Incomplete gifts
Qualified personal residence trusts (QPRT)
Charitable remainder annuity or unitrusts (CRAT or CRUT)
Pooled income funds (PIF)

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22
Q

What is being referenced with the phrase “total calendar-year gifts”?

A

Transfers specific to a single calendar year

23
Q

Political organization donations, educational expenses, medical expenses are all _________ from gift tax.

A

Exempt

24
Q

What are some common unintentional gifts?

A

Adding children to parent titles as an estate planning strategy, adding more than two names to the “unholy trinity” of an insurance policy, forgiveness of a legally enforceable debt, familial bargain sales, adding a child’s name to a bank account; release, exercise or lapse of a general power of appointment above $5k or 5% (5 & 5)

25
Q

What is the formula for calculating total taxable gifts?

Remember “tax on total minus tax on prior equals tax on current”

A

Total gifts for the year
less
Allowable subtractions
equals
taxable gifts
plus
prior taxable gifts
equals
TOTAL Taxable Gifts

26
Q

Why do you add back in the prior year taxable gifts?

A

Because the prior year gifts move you up the scale towards 40% on the first $1M of gifts (cumulative)

27
Q

What is the definition of a terminable interest?

A

The transfer has given someone other than the spouse an interest in the property and the spouse cannot control what happens to the property at death. Ex: Barbara’s house goes to Dan, but then goes to Barbara’s kids

28
Q

What are two allowable deductions to the total calendar year gifts?

A

Marital and charitable deductions

29
Q

What are four requirements for the marital deduction?

A

Married at the time of gift
US citizen
Gift has to be included on year-end gifts
Donee spouse must NOT be given terminable interest

30
Q

What is a power of appointment trust?

A

The donee spouse is given a qualifying income for life and a general power of appointment over the principle, exercisable during death or life

31
Q

What is a power of appointment trust best used for?

A

A married couple with children specific to their marriage so that no one is disadvantaged in the trust (likely)

32
Q

What is a QTIP trust best used for?

A

When there are children outside the marriage. Allows the donee to assign income to his spouse and to his children outside the marriage.

33
Q

What are some common charitable gifts?

A

Outright gift: the simplest
Private foundation: charity and tax, but expensive
Charitable bargain sale: items sold for less than FMV
Charitable stock: donated, highly appreciated stock
Charitable gift annuity: a gift with annual payment to the donor
Qualified charitable donations: age 70.5, donate up to $100k p/y to charity

34
Q

What is remainder interest for a partial charitable gift?

A

Ensures that the charity, at some point, gets the gift and allows for a deduction

35
Q

What is a charitable lead trust?

A

Irrevocable. Allows the donor to donate a gift / income stream to a charity which then the “remainder” goes to a designated beneficiary upon death of the principle. Opposite of a charitable remainder trust.

36
Q

What is a charitable remainder trust?

A

Irrevocable. Allows the donor to donate gift to a charity with an income stream going back to the donor (reduced taxes). The “remainder” eventually goes to that charity upon death of the principle. Opposite of a charitable lead trust.

37
Q

What are pooled income funds (PIF)?

A

Usually used by higher education / alum to fund a big mutual fund of sorts. All donations are charitable deductions and the donor receives an income stream back from the PIF based on fund returns

37
Q

What is a charitable stock bailout?

A

Highly appreciated, closely held stock that is donated to avoid capital gains tax. While they can’t be obligated, the closely held business is likely to buy back those shares from the charity.

38
Q

What trust has the following characteristics?

-Lasts a lifetime of one or more persons or for a term not more than 20 years
-A qualified charity must receive remainder interest
-The income interest is paid to a non charity beneficiary named by the grantor

A

Charitable remainder annuity trust (CRAT)

39
Q

What is the total gift amount for a $500k life insurance policy plus $40k of income-producing property to an irrevocable life insurance trust (ILIT)? Replacement value is $80k

A

$120k gift. Replacement cost (not face value) + $40k premium payments

40
Q

What is the difference between the applicable exclusion amount and the annual exclusion?

A

Applicable exclusion: cumulative gift tax exclusion
Annual exclusion: amount of gift value before taxes owed

41
Q

What does it mean to be tax inclusive vs tax exclusive?

A

This simply means that it is more beneficial to gift while alive to reduce the tax liability instead of after death during estate taxes

42
Q

What is a significant tax benefit difference between gifting and estate?

A

Gift = donor’s basis which can be a significant tax bill
Estate = stepped up basis

43
Q

What does ILIT stand for?

A

Irrevocable life insurance trust

44
Q

What does QTIP stand for?

A

Qualified terminable interest property

45
Q

How is co-owned property valued?

A

TC: FMV by % of ownership
JTWROS: FMV / # owners
TE & CE: 50% FMV

46
Q

What is the general rule with gift splitting?

A

If you elect to split, you split the entire aggregate of all gifts for the year. You can’t pick and choose

47
Q

What is the difference between a CRUT and a CRAT?

A

The unitrust income stream payments depend on how poorly or well the assets do in the trust.

The annuity pays a fixed payment.

48
Q

Given present and future interest, how is each taxed in regards to any credits or exclusions?

A

Present interest has an allowable annual exclusion
Future interest is fully taxed - no exclusion

49
Q

For a martial deduction to be used, the income must be…

A

Controlled by the donee and present interest

50
Q

What does Crummey powers do for trusts?

A

Gives them present interest which then qualifies the trust for present interest

51
Q

What is the difference between the charitable gift tax deduction and the income tax charitable deduction?

A

The charitable gift tax deduction is unlimited

For income tax purposes, the charitable deduction is limited

52
Q

If splitting gifts, who must file the tax return?

A

The donor spouse only. The consenting spouse must sign the donor spouses tax return

53
Q

What is a split-dollar life insurance policy?

A

Allows an ER to provide a key EE with more insurance protection than they could afford otherwise

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